How Did America Become a Net Fuel Exporter? Thank the EPA!

By Jordan Weissmann

Fuel is now the most valuable U.S. export -- and we have regulations to thank for that.

Reuters

In the past few weeks, much has been made of the fact that the United States has become a net exporter of petroleum products. Not of oil mind you -- we still import about nine million barrels a day of crude and ship out a tiny fraction -- but of refined products, such as diesel, gasoline, and jet fuel. According to the AP, they've become our most valuable export.

This is quite a reversal, and it's the result of a few powerful economic forces. According to the Wall Street Journal, the U.S. has been importing more fuel than it ships for the last six decades. But in 2011, the combination of a slow economy and more efficient vehicles hurt demand from American motorists, giving refiners the impetus to send their product abroad. It was basic supply and demand at work. We had excess supply. The world demanded it.

Within that bigger picture, though, there's a smaller and instructive story. It's about how those meddling government regulators at the Environmental Protection Agency may have helped make U.S. refiners more competitive in the global marketplace. How? By forcing them to create cleaner burning diesel fuel.

THREE CHEERS FOR ESOTERIC DIESEL REGULATION!

If you look at the Energy Information Administration's breakdown of the country's petroleum of product exports, one category should jump out at you: distillate fuel oil. That's the technical term for what we all know as diesel. In October of 2011, U.S. refiners shipped out about 2.7 million barrels a day of finished petroleum products. Forty percent of those barrels contained diesel fuel. Gasoline only accounted for 19 percent.

It makes sense that diesel should make up such a big chunk of our finished fuel exports. As Tom Kloza, chief analyst with the Oil Price Information Service, told me, in much of the world diesel rules. Europeans use it to power their cars. South Americans use it to power their tractors. Many governments, particularly in Europe, are requiring varieties with lower levels of sulfer, a major air pollutant that causes respiratory problems and contributes to acid rain. In the last several years, Kloza said, U.S. oil refineries in the Gulf of Mexico have invested heavily in the sophisticated technology necessary to create that kind of clean diesel fuel. Two-thirds of U.S. diesel exports in October were the variety known as "ultra low sulfur."

The investment that made those exports possible didn't happen by accident. Nor was it purely due to the forces of capitalism. In 2001, the EPA issued a new rule that reduced the amount of sulfur allowed in highway diesel fuel by 97%, from 500 parts per million to just 15. Part of the regulations, which went into effect in 2006, forced refineries to begin producing more of the cleaner diesel. In response, oil refiners spent billions updating their plants with the necessary equipment, adding roughly 37% more desulferization capacity.

As a result, U.S. refiners now make a product that's more ready for the global marketplace. That's a double-edged sword domestically. It's great for the country's trade balance. But as Reuters noted as far back as 2008, its also made fuel more expensive here at home. "Before the diesel mandate, much of the diesel produce in the United States fell far short of European fuel specifications, which meant the fuel tended to stay in the United States, keeping stockpiles full and prices low," the wire explained.

As with any change in the marketplace, there were both winners and losers. But not all "job-killing regulations" really kill jobs. Some might just create a few.